What is the difference between variable and fixed rate hire purchase (HP) financing? Should I go for fixed or variable rate hire purchase financing?
FIXED RATE FINANCING
Term charges on a fixed rate hire purchase (HP) financing are calculated on the initial amount financed. Click here for example of calculation of term charge (interest rate) and HP instalments
VARIABLE RATE FINANCING
Term charges on variable rate financing are calculated on the outstanding balance at the end of the month.
FIXED OR VARIABLE RATE HP FINANCING?
In variable rate financing, your interest repayments will vary according to the movements of the BLR 1.
If BLR increases, your term charges will increase, resulting in a higher monthly instalment.
However, if BLR reduces, your repayments will be lower due to lower term charges.
You will have to decide which mode is more beneficial to you based on your expectation of how the interest rate will move in the future.
- Base Lending Rate (BLR) - A minimum interest rate calculated by banking institutions based on a formula which takes into account the institutions' cost of funds and other administrative costs.
Reprinted with permission from BankingInfo (A Consumer Education Programme by Bank Negara Malaysia)
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